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It Is The Partnership Agreement Which Provides Asset Protection |
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FLP: Family Limited Partnership
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The FLP or Family Limited Partnership is an outstanding legal entity for providing lawsuit protection for family wealth. When used as part of a properly designed overall strategy, an unsurpassed level of asset protection can be accomplished. An FLP drafted with the Asset Protective Clauses discussed below, can act as a significant hurdle to a creditor seeking to attach your wealth. |
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An FLP is easy to set up, but they are not easy to set up correctly. While any FLP will provide some asset protection, only a properly structured FLP partnership agreement will offer you the strongest asset protection possible. Our FLP agreement
can include such sophisticated devices as distribution freezes, poison pills, buy-out rights and other specific asset protection drafting.
If an FLP is set up in a “sole remedy” state, your creditor cannot "foreclose" your interests, the "charging order" is the only recourse a creditor has against the FLPs assets. With a charging order, if the FLP Partnership Agreement
was drafted with the protective clauses discussed below, the FLP creditor will not be able to force a distribution of assets. Although receiving nothing,
IRS Revenue Ruling 77-137 has been interpreted to require a creditor holding a charging order to recognize taxable income.
Your creditor will suffer income tax on the assets which were not distributed to him. He can has slapped the "tar baby".
Recent law changes and cases highlight the asset protection advantages of the FLP. At our initial consultation we will point out some of the common pitfalls and traps that should help you to proceed with a clear understanding of planning strategies available with the FLP. |
Our FLPs Has a Fully Asset Protected Limited Partnership Agreement
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Attorneys are lulled into a false sense of security by commercially drafted forms. Clients are lulled by the cheap prices of Legal Zoom. Be aware, a standard FLP without specific asset protective clauses in it's Partnership Agreement will not provide asset protection of the type you are hoping for. |
| How to Asset Protect A Limited Partnership Agreement |
There are almost no state law restrictions on how the FLP Partnership Agreement may be structured. State law allows the FLP Partnership Agreement to override the otherwise governing "default" state statutes. Your imagination is the only limitation. Out of inertia a lot of practitioners simply follow the language of standard "business" FLP agreements or follow the language of the "default" state statutes. They do not add the below "asset protective" provisions. Remember, the FLP Agreement is most important when you and/or the FLP is attacked. It is then that the asset protective language drafted into an Asset Protected LLC Agreement shines. Below are some of the asset protective features I use in appropriate cases. |
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- Cannot Assign Interest. Provide that FLP interests cannot be assigned to creditors or anyone without the consent of the partners
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- Eliminate Certain Powers. Provide that partners have no unilateral power to demand distributions or liquidate the FLP,
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- Non-Disclosure. Provide that the FLP does not need to disclose any company information to non-partners,
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- Executory. Be drafted as an executory contract in order to protect against a bankruptcy trustee stepping into the shoes of the partners,
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- Non-Pro-Rata Distributions. Provide non-pro-rata distributions if agreed by the partners. Most FLP Agreements provide that the General Partner (GP) control the timing and amount of a distribution. However, the distribution must be made pro rata. If our client and an outside party are 50-50 members of an FLP and a judgment is entered against our client, the FLP charging order protection works only if the FLP can cease making distributions to our client. But the outside party wants to continue getting cash out. If the FLP Limited Partnership Agreement provides for only a pro rata distribution, then the FLP must either distribute to both owners or to neither.
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- No Distributions. We insert a provision in the distribution clauses allowing the GP to cease making distributions to a partner pursued by a creditor. Distributions are made pro rata, but an exception is carved out.
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- Poison Pill. Poison-pill provisions allow the FLP to buy out a creditor's charged interest for a nominal amount. The poison pill can be a buy-out clause, triggered by a collection action. It grants the non-debtor partners the right to buy out the debtor partner's interest at a preset price. We use poison pill clauses if the other partners are family members of the debtor. We don't want to lose interests to outsiders.
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- Special Allocation For Tax Purposes. We may include tax language in the FLP Agreement for special allocations (often considered to be the most complex area of the internal revenue code) so you can allocate the income and losses among the partners as needed.
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| We Maximize the FLP Agreement By Filing It in a State That: |
- Limits a creditor to a charging order. The State does not allow foreclosure.
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- Requires a court order for all accountings, directions and inquiries a judgment debtor might make.
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| FLP Plus Equity Strip |
The property owner takes out a large amount of debt (mortgage) on the property. If an asset has a very large percentage of debt associated with it, a successful creditor may not want to pursue that specific asset. |
If the creditor does decide to go after the real estate, they will have to stand behind the first creditor (the bank or mortgage company) holding the loan against the asset. The proceeds from the "refinancing" can then be available for investing in other asset-protected accounts such as annuities and life insurance cash values. For more information about different ways to protect your property click for several different Equity Stripping Techniques. |
| For Greater Strength |
You should not hold FLP interests directly if the FLP holds anything except safe assets (cash, stocks, bonds, etc.). For those FLPs which hold high liability assets, the FLP General Partner interest should be owned by an LLC which in turn could be owned by a Domestic Asset Protection Trust or an Offshore Asset Protection Trust to protect against a potential charging order or even from an argument that the entity is the “alter ego” of the founder. This is the strongest use of the FLP. This insures that the plan is able to withstand whatever degree of scrutiny is ultimately applied. |
Remember, the FLP Agreement
is most Important When You or the FLP is Attacked.
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For Technical Information About Family Limited Partnerships (FLPs),
Please Click the Below Link to My Book.
Chapter 9 | Family Limited Partnerships (FLPs)
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